While taking a $15 billion haircut never sounds fun, what's perhaps most shocking is the rate at which Schwab is earning interest on these securities. agency mortgage-backed securities) was $173 billion, with an assessed fair value of $158 billion. Schwab discloses on page 108 of its 10K that the carrying value of its held to maturity securities (which are held in U.S. Of course, these securities don't just stay in a bubble because they've been reclassified.

held to maturity.' To find the unrealized losses on those two transfers, you have to keep reading until page 58, where it states that these two transfers resulted in 'net unrealized losses at the time of transfer of $2.4 billion and $15.8 billion, respectively.'īy making this switch, for the reasons stated above, Schwab essentially loses the requirement to report unrealized losses and can mark the assets at cost.

On page 31 of the 10K, the company states that 'In January and November 2022, the Company transferred $108.8 billion and $79.8 billion, respectively, of its investment securities from the category to. The company also took efforts to stem the bleeding from unrealized losses by making large re-classifications of securities from held for sale to held to maturity. but the unrealized loss of $22 billion seems to us like a much, well, bigger deal. Normally we would understand a bit of mismatch-a slight gain or loss on a book of long-duration holdings. As a Category III banking organization, has elected to exclude AOCI from regulatory capital.'

Treatment of AOCI in calculating capital ratios has been tweaked over the years by Schwab, but in its most recent 10K the company included a footnote to its ratio calculations that 'changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. In 2022, the number stood at negative $22.2 billion. At the end of 2021, it was a negative $1.1 billion. This may not matter so much in a non-volatile interest rate environment, but the amount can be quite sizable when interest rates are moving.įor example, at the end of 2020 Schwab had a positive $5.3 billion AOCI. The reason all of this matters is because Accumulated Other Comprehensive Income (known as AOCI, this figure incorporates gains or losses not reflected in earnings like unrealize gains and losses) are excluded from the bank's common equity Tier 1 capital. Conversely, bonds classified as held to maturity are immune from this accounting treatment because the institution is expected to hold the bonds for their life-that is, they aren't shopping these around and expect to get their money back, so why post unrealized gains or losses on something that you aren't looking to get rid of anyway? If a bank holds a bond on its books as held for sale (or available for sale), then these instruments are required to be valued at essentially fair-market value. Securities in a bank's books can be held in various ways, and those ways typically each have a different method of accounting. Well, this is where accounting comes into play. So, moving in a positive direction, right? At the end of 2021, Charles Schwab Bank reported a TCR of 7.1%, and 7.3% in 2022. The Charles Schwab Bank is required-per the company's 10K-to have a TCR of at least 5%, with a company-internal target of 6.25%. The TCR takes the bank's equity capital and reserves against its risk-weighted assets. Why has this household name stock, which most know as an investment platform but which also operates a sizable bank, been caught up in this mess? And should investors be concerned? Getting Ratio'dīefore we dive into why Schwab is getting hit, let's briefly cover one of the main ratios used by regulators to determine a bank's financial health, the Tier 1 Capital Ratio (we'll call it the TCR). The big question on most investor's minds is a single word: why? However, over the last several days the stock has taken a beating right alongside these lesser-known names, falling by over 30%.

On the surface, Charles Schwab ( NYSE: SCHW) bears very little resemblance to the startup and crypto-funding banks like SVB Financial Group ( SIVB), Silvergate ( SI), and Signature Bank ( OTCPK:SBNY).

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